Good morning, everyone, and welcome to our webcast. I will provide an update on our business environment before handing over to Pete for the financial details. We will then take questions. We closed 2014 with good momentum across the group and in the first six months of the year, we have seen further good performance as well as indications of a generally improving market environment. We have demonstrated resilience driven by efficiencies and focused investment to protect our core franchises over the longer term.
We expect to continue to perform well as those markets stabilize. Challenges however remain. We need to win order intake in our military air business to maintain continuity of production. I'm confident in the capability of our products and that we can also meet affordability challenges. As flagged earlier this year, we have an increasing gap in workload at our naval shipyard in Melbourne.
We continue to pursue a solution with the Commonwealth, but have not yet been able to establish an Australian naval industrial strategy as we have in The UK. For some time now, we have pointed to the high level of order intake outside of The UK, U. S. We are seeing good growth in our missile joint venture positions, MBDA has also been a major beneficiary of recent French aircraft sales in Egypt and Qatar. Our share of MBDA orders from those two contracts alone will exceed €1,200,000,000 In fact, on top of the £1,700,000,000 of order intake outside The UK, U.
S, we also have £1,300,000,000 of orders being finalized. Support to our equipment or military operations in The Middle East has been intensive and the availability of the aircraft high, testament to both the equipment and long term progressive relationships that exist. We have been operating in The Kingdom Of Saudi Arabia for close to fifty years. Overall, the Group's first half performance supports our expectations for top line growth this year. We continue to anticipate marginal growth in underlying earnings per share this year despite the lack of earnings accretion from share repurchases.
That growth outlook remains conditional on military air orders and the review options for our Melbourne shipyard facility. The market outlook in The U. S. Is starting to clear with some encouraging signs of a return to growth in budgets. We'll wait to see how these develop into hard procurement before amending our plans.
Our U. S. Defense electronics business is performing well with substantial new business opportunities in the electronic warfare, electro optics and ISR defense sectors. F-thirty five deliveries will also increase significantly over coming years. Our commercial aerospace electronics business also continues to develop well.
The business has been selected to provide the remote electronic units for the new Boeing 777X. With this award in addition to previous equipment awards in this aircraft, we will now be providing the complete suite of flight control electronics for the aircraft fly by wire system. The U. S. Interior notwithstanding market headwinds.
In April, a strategic review commenced to examine whether greater value may result from disposal of one or more of the group's manpower and services businesses. This review does not include the technology product focused Geospatial Intelligence division. It is important to note that transaction will only occur if it creates value for our shareholders. As anticipated, the Group's U. S.
Based combat vehicles business is stabilizing after several years of customer contraction. Following the award of the armored multi purpose vehicle contract at the end of last year and other strong franchise combat vehicle programs, the medium term outlook in our land sector is improving. In the naval domain, our Navy ship U. S. Navy ship repair business is performing well and The U.
S. Commercial shipbuilding business for which charges were announced last year is making operational progress. Three of the eight vessels have now been accepted by their customers. These commercial contracts will however remain challenging until completion of all the ships in 2016, particularly in our Alabama facility where competition for skills is high. The UK businesses continue to perform well with much of our business subject to long term plans and contracts.
The recent budget announcements are supportive and the £500,000,000 reduction in the current year defense budget is not expected to materially impact programs in which the group is engaged. Our strategic defense and security review is anticipated later this year. The current expectation is for continued stability across the group's large platform and support program activities. In the air domain, our UK based production of rear fuselage assemblies for the F-thirty five aircraft is set to increase significantly over coming years to meet the requirements of the program for both the U. S.
Armed Forces and international customers. Typhoon Aircraft deliveries to the Royal Air Force and the Royal Saudi Air Force continued alongside airframe sub assembly deliveries for our European partner nations. The release of additional capabilities for Typhoon aircraft is progressing at pace. This includes clearance of additional weapons onto the aircraft as well as e scan radar development. In addition, we continue to provide extensive support and upgrades for aircraft in service with the Royal Air Force.
In the naval domain, we have a large order backlog and good long term visibility benefiting from work over recent years to develop with the UK government, a coherent industrial strategy for The UK naval sector. The Queen Elizabeth class carrier program progresses with assembly of the second ship well underway alongside systems integration and commissioning on the first of class. Following the renewal of multi year agreement to manage Fort Smith's naval base, we are progressing plans with the Royal Navy for the support and basing of the two new carriers at their intended home port in Portsmouth later this decade. In February, the UK government announced its commitment to the Royal Navy's new Type 26 frigate program. Consistent with the UK government strategy for naval shipbuilding capability, are progressing the build of three offshore patrol vessels.
These vessels not only sustain key skills, but also drive de risking of the follow on Type 26 program. Infrastructure investment required in support of the proposed successor submarine program expected to replace the Royal Navy's Vanguard class boats has been agreed and work commenced at BA Systems Barrow facility. Artful, the third of seven Astute class boats will exit Barrow later this year, a major milestone for the program. There are 1,500 people working on successor and some 7,000 people operating in the submarines business overall. In Saudi Arabia, we continue to support our customer in addressing current and future requirements.
We are seeing a high volume of support and urgent operational activity, reflecting the high tempo of operations being conducted by both Typhoon and Tornado aircraft. The equipment supplied by the company is achieving high levels of availability. We now have 5,600 people working in Saudi, of which 61% are Saudi nationals. We are being recognized for our contribution to the Saudi national agenda. We are facing a challenging outlook in our Australian naval shipbuilding business as we run off from a high volume of activity on the successful landing helicopter dock program.
We are facing an increasing gap in workload at our naval shipyard in Melbourne. The group is reviewing options for the facility and to mitigate the impacts. BA Systems holds a 37.5% interest in MBDA, the pan European guided weapons business. The high level of order intake for equipment to support Tornado and Typhoon aircraft in service in Saudi Arabia is contributing to the good growth now anticipated in MBDA. In addition, MBDA has been a major beneficiary of recent French aircraft sales in Egypt and Qatar.
We continue to address opportunities in our international markets. In India, we have seen some renewed activity on prospective contract for N777 Howitzers and we are commercially negotiating the next batch of Hawk aircraft. Work progresses to plan on the Mani Hawk and Typhoon contracts and we continue to pursue other international prospects for these platforms. We enjoy renewed strong support from the UK government in pursuing export opportunities, what key when you're engaged in these types of campaigns, a real plus from the clear UK election result. We continue to address the growing cyber market through our Applied Intelligence business.
This is a fast moving space and we are moving rapidly to address it. The SilverSky acquisition has gone well. It is a key part of our strategy to develop and grow our position in the expanding commercial cyber market, building on our government cyber credentials. SilverSky is now an integral part of our implied intelligence commercial solutions division. We are also undergoing a rapid organic expansion having recruited some 900 people in the first half of the year and expensed over £50,000,000 on product and market development.
Prospects for the business are good and we have a very active pipeline of new business, which we expect to secure in the second half and which supports our full year expectations for strong growth. I will now ask Pete to take you through the financials. Pete?
Thanks, Ian, and good morning. As usual, I'll step through the results for the half year and then I'll move on to the twenty fifteen full year guidance. The results have seen some benefit from a stronger U. S. Dollar.
And for reference, the dollar rate has averaged 1.52 so far this year compared to 1.67 last. So the headline numbers and compared to the 2014, sales increased by some £900,000,000 to £8,500,000,000 Around £200,000,000 of that increase was due to exchange translation and we continue to expect some second half bias in sales due to the contracted schedule for deliveries into The Kingdom Of Saudi Arabia this year. Underlying EBITDA of £800,000,000 was almost unchanged from last year and that includes a twenty one million pounds translational exchange benefit. Underlying finance costs in the first half were higher at £107,000,000 largely for the cost of carry of the $1,100,000,000 bond pre financing that we put in place in October. Underlying earnings per share was 17.1p and the reduction of 0.6p was largely as a result of that higher finance cost.
There was an operating cash outflow in the first half of £349,000,000 and net debt at June 30 stood at £1,900,000,000 and I'll cover the cash position subsequent charts. Order backlog has reduced to £37,300,000,000 of which £500,000,000 is due to exchange translation. And finally, the interim dividend has been increased to 8.4p per share, up 2% on the 2014 interim. There were a number of items impacting the balance sheet and in particular working capital in the first half of the year. As anticipated, advances continue to be consumed on the Omani Typhoon and Hawk program, the European Typhoon contract and the Saudi Training Aircraft contract.
The second of the two payments under the Salaam VOP settlement has now been received. Costs are being incurred against a number of provisions created in previous years including The U. S. Commercial shipbuild program and on U. K.
Rationalization. The IAS 19 accounting pension deficit has reduced over the six months to £4,800,000,000 That pension deficit reduction also reduces the deferred tax asset. I'll move straight on to the pension deficit position on the next slide. The value of the scheme assets is unchanged since the start of the year at £23,800,000,000 and that's after pension benefits paid out of some £600,000,000 Liabilities reduced by £600,000,000 to £30,000,000,000 Real discount rates have increased by 10 basis points in The UK and by 40 basis points in The U. S, mainly driven by slightly higher bond yields.
The period's discount unwind and pensions paid broadly net out. So overall, a net £600,000,000 decrease in the pretax accounting pension deficit. As you know, the pension accounting is not the important issue. It's the funding position that's most relevant. And following last year's annual funding agreements, as previously advised, cash payments this year into the schemes against those deficits will be similar to last year totaling close to £400,000,000 So moving on to cash.
This slide sets out the movement from our net debt position of £1,032,000,000 at the beginning of the year. There was an operating business cash outflow of £349,000,000 Interest and tax payments were 154,000,020 fourteen's final dividend paid in June was £389,000,000 Since commencement of the share repurchase program, we have bought back 120,000,000 shares at an average price including costs of $4.16 pence. As with all uses of capital, we apply strict criteria to the share repurchase program. We consider the return generated from the cash dividend that we save rather than the earnings per share accretion. And clearly, those returns diminish the higher the share price.
And as a result, activity on the program has been minimal in the first half of the year. All the other cash flow movements totaled £11,000,000 and so we closed at June 30 with gross debt of £3,300,000,000 cash of £1,400,000,000 and net debt of $1900000000.0.07 50,000,000 will be repaid in August in respect to the first of the two pre financed long term maturing bonds. The cash flow performance of the five secondtors is shown here and I'll return to this when I cover the results of each of the sectors. But just to note, the total cash outflow for pension deficit funding in the period was £186,000,000 and the cash outflow at head office contains £160,000,000 of that. So moving now to the sectors, I'll cover the year to date performance here and then return to the full year outlooks a little later.
And the first of those sectors Electronic Systems and the numbers here in U. S. Dollars. The sector delivered sales of $1,900,000,000 3% ahead of last year. Sales in the commercial areas of this business now stand at 23% and growth in the first half was 12%.
Sales defense side was stable with growth on the F-thirty five program offsetting contracts completing in 2014. The return on sales achieved 15% was also ahead of expectations and well up on the 2014, benefiting from strong program execution across most business lines. Cash conversion of EBITDA in the first half year was better than last year and we do expect an improved conversion level over the full year. Order backlog stands at $5,800,000,000 slightly down since the start of the year and that's pending a number of expected second half awards. The Cyber and Intelligence sector comprises the U.
S. Intelligence and Security business together with BA Systems Applied Intelligence and the numbers again here in dollars. In aggregate, sales were almost unchanged at £1,350,000,000 The U. S. Business saw just a 2% decrease in line with the expected further reductions in IT services.
Growth in the Applied Intelligence business was 16%, benefiting from the acquisition of SilverSky at the end of last year. The business has seen some delays in short cycle order awards developed and this has constrained sales in the first half year. Margins of 5.9% reflect the expensing of the integration costs of SilverSky and the accelerated product development costs and sales team build up in Applied Intelligence in support of our full year growth expectations. Order backlog again increased to $3,200,000,000 And despite the first half top line pressures, in The U. S.
Business grew marginally on securing a large classified program award. In the Applied Intelligence business, after adjusting for exchange translation, backlog grew by 6%. In the Platforms and Services U. S. Sector and in line with our guidance that we gave back in February, sales in the first half year reduced by 12% to $2,000,000,000 and that reduction comes from last year's completion of the ground combat vehicle development activity.
Recognizing the disposal of the South African land business and exchange translation, the sales reduction was 9% on a like for like basis. Margin performance for the first half year is also per guidance at 6.9%. Cash flow is being impacted by the utilization of provisions created against The U. S. Commercial ships programs and the customer advances on the CV90 Norway contract along with investment on the new floating dry dock in San Diego.
Order backlog is reduced in line with the sales traded on the long term multi ship, multi option contracts in the Naval Ship Repair business. In the Platforms and Services U. K. Sector, sales were at 3,544 million pounds up 25% compared to the 2014. Whilst European Typhoon deliveries have a much more balanced profile this year, on the Saudi program, there are four aircraft deliveries in the first half and nine scheduled in the second.
One point to note, the business is contracted for the supply of the radar and DAS equipment for all 88 of the European tranche three aircraft. This was not the case for tranche two. And this has added incremental sales recognition of some £300,000,000 in the period, albeit the group only takes a small handling fee on this minimal risk element of the contract. With regards to the return on sales, you recall that the 13.8% seen in the 2014 benefited from strong program execution and risk reduction on the European Typhoon Tranche two production as deliveries moved towards completion. We are now delivering against the Tranche three contract.
The dilutive impact to the return on sales from trading of the radar and DAS equipment is around 50 basis points. As expected, the £296,000,000 of cash outflow in the period reflects the consumption of customer advances on the Omani Typhoon and Hawk program, the European Typhoon contract and the Saudi Training Aircraft program. There have also been rationalization costs charged against the provisions created in prior periods. And order backlog reduced to £18,700,000,000 primarily on the trading of Typhoon aircraft, Carrier and Astute. Sales in the International business for the first six months of £1,621,000,000 are 6% higher than in 2014 on a like for like basis.
The delivery of weapon systems to the Royal Saudi Air Force and milestones on the Australian landing helicopter dock program are weighted to the second half. EBITDA was £155,000,000 giving a broadly consistent return on sales of 9.6% after taking a small charge of £5,000,000 for some 200 redundancies announced at the Williamstown Shipyard during the first half year. There was an operating cash outflow of £49,000,000 which does include the second payment under the Salaam VOP agreement. You will recall that some £200,000,000 of receivables were collected in December ahead of the contracted due dates. Order backlog is at £10,700,000,000 on the trading of our five year Saudi support contracts.
For reference, there's a chart providing a summary of the trading performance of all five of the sectors and the numbers for HQ appended to the presentation posted on the web. Turning to guidance. This chart you'll be familiar with from our February results and it sets out the guidance for each of the sectors through to the end of the year. And of those five sectors, guidance has only materially changed for one. So that's the one I'm going to talk about.
In the Platforms and Services U. K. Sector, sales are now expected to increase by close to 10%. There are 13 Salaam Typhoon deliveries planned against last year's 11 and the Typhoon Tranche three deliveries of radar equipments that I referred to earlier were not previously included in the guidance. In the naval domain, we expect higher sales from the activity on the Stutt and Successor programs to more than offset the reducing carrier trading.
Margin guidance is unchanged. That's at the lower end of our 10% to 12% range being impacted by some £35,000,000 of higher pension service costs compared to last year as well as the margin percentage dilution from trading of radar and gas equipments. Guidance for the headquarters charge, underlying finance costs and effective tax rate are also unchanged. And so overall, we continue to expect the group's reported earnings per share to be marginally higher than 2014 despite the lack of earnings accretion from share repurchases. That growth remains conditional upon anticipated aircraft orders and review of options for the Melbourne shipyard facility.
This final chart highlights the cash utilization we expect in 2015. The first column shows the position at the half year. The second column provides the full year guidance. In respect of operating cash flow, we're not planning for any material capital expenditure above depreciation levels. And within working capital, we expect to incur costs of around £200,000,000 against provisions created in previous years held in the balance sheet.
The most volatile area as always remains the level of customer advances. And as expected, against the major advances we received in 2012 on the Saudi trainer aircraft contract and the Omani contract, we are seeing a high level of utilization. You recall that under the terms of that Omani contract, no further cash will be received until deliveries commence in 2017. Advances are also being consumed on the European Typhoon production program. The final operating cash flow item is The U.
Pension deficit funding, which will again be close to £400,000,000 The non operating cash flow items are far more predictable. Outflows for interest and tax are expected to total around £300,000,000 and dividends will be close to some £700,000,000 Purchases under the share buyback program will be made where they deliver value for the shareholders. And as I mentioned earlier, we apply the same stringent criteria to share repurchases as we do to all other capital allocation decisions. Under the transactions announced last year, we have had receipts now from the disposal of the land business in South Africa and we expect receipts in the second half from the restructuring of our Saudi partner companies. In total, we continue to expect net debt to increase in 2015, albeit with some volatility around advanced payment on contracts.
And just to be clear, this guidance does not anticipate any possible disposal transaction relating to the group's U. S. Manpower Services business. And on that point, I'll turn it back to you, Ian.
Thanks, Pete. So in summary, the group continues to perform well with a large order backlog. With some anticipated trading weighted to the second half, we remain on track to deliver top line growth and subject to the previous flagged conditions, marginal growth and underlying earnings per share this year. In recent years, we have developed a robust services business, leveraged our capabilities in adjacent growth markets and maintain disciplined cost control. We have also continued to invest in developing skills and new technologies for the future.
These actions have provided resilience through an extended period of reduced defense spending in some key markets. BA Systems is well positioned to benefit from a generally improving market environment. Thank you. We will now take questions. Who's first?
No questions? I don't believe it. Sorry, I couldn't really hear that. Rami, do you have a question?
We will now take our first audio question from Rami Meyersen of Investec. Please go ahead.
Good morning, gentlemen. Can you hear me?
Yes, we can hear you loud and clear, Rami.
Excellent. Two questions, if I may. First, on Eurofighter production in the medium term. Can you talk about what your plans are if the some of these export orders do not materialize and you decide together with the partner nations to extend the production of Eurofat at lower volumes? And the second question, post the budget announcement, I appreciate that we are still ahead of an SDSR.
But given there's going to be growth in UK defense spending, do you see areas where you may increase investment or potentially do acquisitions to position yourself going forward?
Two questions, right. First one is on maintaining production rates on the Typhoon line. Was that the first one?
Yes. Type of production rates do
you expect to see going
forward and how that will impact profitability?
Okay. I think as we talked before is that we have a line today, which does 30 a year. And what we said is that if we needed to reduce the capacity on that line or the throughput on the line to sustain the continuity of production, that's what we do and we make that decision in the final quarter of the year depending on where we are with orders. So that's still the plan. We're still going for plan A and as we explained previously, at the moment we're out with the supply chain saying cheaper, faster, faster and we don't want to have to go out with a different set of messages and talk about a slowdown to maintain continuity and that's where we are and that's a final quarter decision.
In terms of the SDSR, well, I think going into an SDSR with an agreed budget is the first time in sort of my tenure in this company where we've had that position. So we have some more stability. I think the important thing is, and this goes back to the manifesto of the conservative party is the £163,000,000,000 of commitment over the next ten years on defense procurement and that's the thing which provides us stability on our programs. Areas where we will focus on is technology areas that we're spending in The UK remains our core business of combat aircraft and in fact unmanned technologies. I think we do not spend an awful lot of money sustaining capability in nuclear submarines because we provide that capability to one customer only.
So the fact that there is a consistency in budgets going into a strategic defensive view, I think is the most comfortable position we've been in for a while as the government determines what capabilities it wants for the future is the consistency because it feeds off what they did previously in the 2010 SDSR. And so I think we are going to get a lot more visibility and stability on the core programs going forward.
And do you think there will
be areas where you may have to increase investment, cyber security as an example?
There may be areas where we would have to increase emphasis on existing spend, which would clearly security and unmanned aircraft if there were programs defined that required that. And we're flexible and we are have the capacity to do that.
Okay. Thank you very much.
We will take our next audio question from Christian Lachlan of Bernstein. Please go ahead.
Hi. Good morning, gentlemen. Just quick kind of high level follow on on SDSR, if I may. So your comments Ian on the budget stability or providing at least some clarity versus last time were helpful. But in terms of of the SDSR so far that you've observed compared to 2010, is there evidence that suggests either through better government communication or otherwise that the that you're, I guess, bullish for lack of a better descriptor on a more orderly process and determining where some cuts and adjustments will be made?
And then as a corollary question to that, are there particular programs, platforms or domains of concern that you're particularly focused on going into the autumn?
It's a great question. It certainly is a lot more orderly than we went into the previous SDSR, when it was unclear as to budgets and what engagement there would be within industry to define capabilities that are required. So we are much more comfortable with the process. And because it's a continuum from the 2010, it's a much more structured review that they're going through. In terms of their focus on platforms and systems, I think that we have pretty good visibility and we don't expect anything that is going to come out of that, which is a real change in momentum that we've had previously is probably the best way to do it.
So we are not expecting a huge number of surprises.
Okay. Thank you.
We will now take our next question from Edward Stacy of Bessi. Please go ahead.
Hi. Just firstly, sort of taking a break from U. K. Budget. MBDA, I see some headlines this morning that you were talking about the Finn Mechanica process.
And I just wondered with MBDA, what are the possible outcomes that you'd consider in terms of do you end up as a minority with Airbus being the majority? Or do you talk to Airbus about getting yourselves squeezed out of MBDA entirely? Or what are the options that are realistic for
you There's to look a very simple answer to that question and is that MBDA is a core part of our portfolio, very strategic part of our portfolio. We have rights on the original agreement, which means that we have preemption rights that we cannot become a minority partner and we will not become a minority partner in that joint venture.
Great. That's very clear. And then back to UK budgets again, the successor submarine is a very big program. And previously, there was talk that that comes out of the or is excluded from the baseline procurement budget. But I think we're going into this SDSR with successor funding has to come out of the baseline procurement?
And so then in answer to the previous one of the previous questions, you said that you don't have any big areas of concern. But it seems to me like there must be a big squeeze on some area or other in order to accommodate successors. So am I wrong in that thinking? How do
you think that
you're I'm going to not sure you're right in that thinking. It has been in their plans. It was in their budget assumptions going forward. So I don't think there is an intention that it's taken out of the defense budget. It's a fundamental portion of the spend going forward.
But I mean, it's within the baseline procurement budget that they're going to fund successor. So there has to be if that's a big new thing kicking in, there must be some big thing
that's coming
in. It was always in their assumptions going forward.
Okay. Got you. Thank you.
We will take our next question from David Perry of JPMorgan. Please go ahead.
Yes, good morning gents. Two separate questions please. The first one is, could you just give us the two sort of potential caveats to the hitting the full year EPS? Is it possible to sort of put some numbers around those just so we can have an idea of the magnitude? I mean, heard obviously the previous answer on Saudi, but I guess the profit recognition this year wouldn't necessarily have to do with giving us your thoughts on next year's production rates.
So just what the two, the sensitivity to Australia and Saudi might be this year? The second one, Peter, is I'm just a bit confused by the messaging around the share buyback because and I may be wrong here. I haven't gone back and looked at the transcript from February. But back in February, the share price was, I think, around 5.2 But you had the €400,000,000 outflow for the buyback in your slides as part of your cash flow for the year. So something has changed in terms of the way you think about it, and I'm a bit confused as to what that is?
Thanks.
I want
to cover Australia and the share buyback and then I'll come back on Typhoon.
Yes, fine. On Australia, the issue there is around the review of the options of the facilities in the Melbourne yard. In terms of is the number material to the group? Not really. Because our guidance is for marginal growth in earnings, then the sensitivity is to that marginality, if you understand that point.
So that's the sort of issue with Australia. It's not a big number. In terms of the buyback, as I said, the key for us on the buyback is delivering value for the shareholders. When we announced this buyback program going right back to the beginning, the share price was down at 3.2%. And the way we look at the value is from the dividends, the future dividends that you save from buying back shares.
Clearly, the higher the share price, the lower the return. We want a return that's going to at least be more than WACC and we look at the return on an IRR basis. So we will continue to buy tactically when we see share price weakness. But if the next question is going to be what's the share price, I'm not going to give you that number. It's all about value for the shareholders.
So when we come to Typhoon production base, I mean, David, as you know that we have long term contracts and we try and we pray prudently over those long term contracts. So if we have to slow down manufacturing on those existing contracts to maintain continuity, there will be an increased cost associated with doing that, which will impact the average return on the program, which would mean it would impact profit in this year.
And can you
help us? We are not going to quantify that number for you.
Okay. Thank you. We
will now take our next question from Robert Stallard of Royal Bank of Canada. Please go ahead.
Thanks so much. Good morning.
Hello? Robert,
we can hear you. Good morning, Robert.
Okay. Good morning. I saw a couple of questions on your largest end market, The U. S. The FY 2016 budget appears to be coming together better than expected.
Given on what you see today, where do you think the positive impact could be on your business? And then secondly, obviously, you've announced this restructuring or consideration of strategy in The U. S. What's been the initial reaction to that announcement? Have there been any potential buyers knocking on your door?
Thanks.
Why didn't I'll ask Gerry to cover the FY 2016 budget and then I'll talk about the process that we're going through on the assets in The U. S. So Gerry, face the cameras they say or cameras in this case.
Good morning, Robert. How are you?
Good. Thanks.
With respect to The U. S. Defense budget in FY 2016, as you know, the President submitted a budget that's about 5% to 7% above the Budget Control Act caps. And in addition, both houses, both chambers of Congress have passed budgets at about a similar level. So that's very encouraging.
In terms of support, a number of our key programs are included in there from the F-thirty five to our entire electronic combat suite, some very key programs in our combat vehicle business, ship repair and modernization as well as even our munitions business. So we're very pleased to see that our portfolio is very relevant to those budget submissions. With respect to going forward, as you know, there is a little bit of a debate as to how much of that increase will be in the base budget and how much will be funded through contingency operations. And that political debate we expect is going to run for the next couple of months. So we anticipate a brief period under continuing resolution.
But in general, I think we along with the rest of our counterparts and industry are encouraged with the trend that we now can see actually a climb out of this trough and a recognition of worldwide conditions.
Terms of assets in The U. S, I mean, this process was triggered, the strategic review of the process, because of some inbound interest. So we do have interest in our businesses. But as we've always said is, these are very well performing businesses and as you can see in the first six months, they have performed well. And so we will not do anything unless this generates shareholder value.
These are not businesses that we have to sell. It's not a fire sale, but we did have some inbound interest and we thought it was the right thing to do to go through the strategic review as to who's the best holder of these businesses.
Thanks, Ian. Maybe just a quick follow-up on that. If you do achieve some disposals, what do you expect to do with cash proceeds?
We've always said that we have a really clear capital allocation policy and we will follow that capital allocation policy. And if your next question is what are your areas of focus for acquisitions? We've always been clear in defense and commercial electronics and cyber. These are the areas that we see that we should still be looking as to whether those businesses that we should be buying and investing in. So nothing has changed from that allocation policy and or our areas of focus.
Okay. Thanks very much.
We will now take our next question from Nick Cunningham Please go ahead.
Yes, good morning. Thanks very much. I mean, all the big issues I think have been raised, I'm aware of. But there's
a couple of things I'd
like to just follow-up on that. First one, there's been some very specific reporting around Typhoon, particularly from James saying that there'll be a production break in 2018 even if you get Salaam II. And first of all, have you and then source of that was water management. So actually, that's good quality. And so question is, what's the veracity of that?
And what sort of effects does that have rippling back? And then secondly, just following up on the buyback and M and A questions. Is it possible to lay out what the calculus is behind the buyback rationale so that we can understand it and perhaps even have a go at forecasting it going forward? And secondly, would it be possible sort of, if you like, S. Corporate style to lay out what your criteria are in terms of M and A as to what sorts of returns you look for in both earnings and cash flow terms in order to justify a particular acquisition?
And also what's the acceptable level of leverage as well? Thank you.
So where do we send our strategic plan to then, Nick? Do you want to?
Agency partners.
Don't you cover them and I'll come back on the Typhoon question.
Yes. Mean the buyback is if you like gives us a benchmark. What we're looking for is an IRR that's going to be better than our weighted average cost of capital. We save dividend. It's sort of relatively risk free.
Nothing in life is completely risk free, but it's relatively risk So sort of building then on the question about how do you assess M and A? Well, clearly, you're buying someone else's business rather than your own shares, there's a lot more risk. So when we look at the discount rates we'd apply when you look at another business, we put a fair bit of risk premium on top of that WACC rate. I don't think you'll find that would be dissimilar from any other company's approach.
And is that sort of year three type target WACC plus risk?
Yes. I mean, we would normally look for year three.
So on your first question, Nick, I think it's we've been very clear for a long time that if you continue that the current production rate on our existing orders in our order book, then Typhoon doesn't have any orders beyond the March 2018. So that's a fact. There is also a fact that at the same time we are ramping up production on F-thirty five. So if we had to reallocate resource, because if the timing of orders required us, we are very able and have done that many times and we would also then have discussions with the supply chain. So this is something that we can manage and is part of our core skills.
Thank you.
We will now take our next question from Olivier Brochet of Credit Suisse. Please go ahead.
Yes, good morning gentlemen. I would have three please. The first one on JLTV, if you could update us on how you see your chances on this program. The second on the exports from The U. S, if you can give me a sense of how much of The U.
S. Revenues, let's say, 11,000,000,000 for a rough number, would be export related, either direct or indirect through The U. S. Your U. S.
Peers? And third, a quick question on the Typhoon margin. I understand that you don't want to give a sense of how big the impact could be if there is any change. But is it fair to say that there would be an impact coming from the lower rate in the future impacting so lower fixed cost absorption and a change of the past margin?
Yes. As we said previously, because of the way that we trade on programs, if there's a cost we averagely trade. So if there's an increased cost, it would affect margins that we've traded and there will be a trade back of that margin. So yes. Gerry, I think you've got the first two questions.
With
respect to the first question on JLTV, it's a very competitive award. We are partnered with Lockheed Martin. We think we have a very innovative approach, but it will be a hotly contested program. I think the award decision is scheduled from the Department of Defense in late August, September timeframe. After that, we may go through a period of protest as is not unusual on a highly competitive program.
So it will be some time before I think that one sorts it out. With respect to exports from The U. S. Business, in 2014, 2015, we will be roughly about 12% to 13% export. And as we get out into our business plan over the next three to four years, we see that at least doubling and possibly even above that.
Then to follow-up on that, would that thirteen percent twelve percent to 13% include both direct and indirect?
That's correct. That's as a percentage of total revenue.
Okay. And just back on GLTV, how big is that in terms of revenues for you in this contract?
The initial award, it will follow as most combat vehicle programs, two to three year development and testing program before we see any meaningful production revenue coming in. So it's not that material to our plan over the next couple of years on the development phase. So it would not be until the 2019, 2020 timeframe. And I think it's too early to forecast exactly how The U. S.
Budget would shake out.
Thank you very much.
Olivier, if I could just add I to mean, just to be clear, the JLTV is an opportunity. It's not actually in our baseline plan or guidance.
So as we've said before, if we won this, this would be in addition to our plan. That's not to say that we're not supporting it and fully behind what Lockheed are doing. And I think it's fair to say that relationship is working well, Gerry. So Gerry, every time Lockheed Martin sell an aircraft and every time Boeing sell an F-fifteen overseas, that has our electronic warfare on it. So that's why also you have to take that in account in the what you would call the indirect exports.
We will now take our next question from Ben Fiddler of Deutsche Bank. Please go ahead.
Yes, hello. Thank you. I have two questions, both of which were related to Eurofighter and Saudi and actually other potential campaigns. The first one, your new guidance for the full year movement in customer advances, you've lowered the range by €200,000,000 I'm just wondering what, if anything, I should read into that lowering of the advances number about your confidence on securing or not securing the necessary Typhoon export orders in Q4? The second question on Eurofighter, again, even if Saudi Baqs 2 does come along, clearly, gives you a help, but only twelve to eighteen months further production visibility on the program.
So just wondering what other realistic export campaigns and other hopes that you have in the pipeline to further extend further extend Typhoon production even post the Saudi win?
Well, I'll
ask the second one. I mean, as you know, Ben, we've always talked about extending the production out through 2021, 2022. And that was with the further 100 aircraft to finish the first 12 of the 12 that we got in Oman a few years ago. That is still the plan.
On the advances guidance, we have shifted it slightly, but that's not really about the receipt side, that's about the burn rate in which we're building up. So we are actually getting across the whole year, will be about £200,000,000 higher in terms of the inventory levels that we've built and therefore that flows from the prepayments we already have from the customer. So it's not about receipts, it's about payments.
And can I also read into the range that you've given, which is still GBP 500,000,000 wide as the potential delta pending receipts and how those receipts may or may not pan out? Or is it really the 500,000,000 is due to just how the outflows go rather than how the inflows arrive, if you see what I mean.
It's a mix of the two, Ben. It's a mix of the two.
Okay. Thank you.
We will now take our next question from Harry Breach of Raymond James. Please go ahead.
Ian, Peter, can you hear me?
Yes, I can hear you.
Good morning, Harry.
Good morning. Just a couple
of quick ones. Peter, I missed your point earlier on revenue. Did you back out the first half twenty fifteen revenue growth impact from currency and from acquisition and disposals? And if not, could you share it with me? The next one was maybe more for Iain about whether you could give us any sense in your views on export campaign activity for Typhoon, not thinking about The Middle East really, more thinking about other prospects, be they in The Far East or potentially in Europe?
And then finally, on Implied Intelligence, I suppose the first half was a little bit slower in terms of backlog growth than we've seen prior six month periods. And it feels from the context of the presentation that, that's about phasing. Can you give us any color about activity levels in terms of order intake at Applied Intelligence in the half?
Let's cover Applied Intelligence. Mean, you remember last year, we did end with a huge order book. So we do have quite a bit of visibility of trading of that order book and it is second half loaded. And generally, the business is active across all of its three divisions. So we have good visibility and we're comfortable with the guidance we've given.
As you can see, we've recruited about 900 people. We've spent £50,000,000 on product development and market development. This is full on. They're meeting their targets on releases of new product sets, the quality of the order book, the quality of the customer bases as we would expect it. So it is second half loaded.
Yes. But just to to that, mean the order book, the order backlog was growing 37% last year. You have you've got it in the backlog, it's about execution.
And the other issue, Harry, is remember we expense the majority of costs in this business. I think we expense about 95% of costs. It's not something that sits in WIP. It's not that type of business.
No. It's more about order intake in the half, Ian.
Harry, we had an extremely high order intake in the final 2014.
Okay. And then export and revenue?
Exports and revenues, there's a concentration on The Middle East, but there are some prospects in The Far East and in Europe. You have to take these things in the round, which is why we've always talked about this 100 further aircraft of sales over a period of time. What we do is we make sure that we fund the campaigns 100%, so that we're not suboptimal on the funding and the teams of people that are operating on them.
On the revenue question, Harry, I mean we were £900,000,000 up in terms of sales half year over half year, 200,000,000 of that comes from FX. There's very little movement around the M and A. We have the land business in South Africa, which we sold and we have the SilverSky acquisition that we acquired. So the net is not much between the two. And the other piece is the trading, as I mentioned, of the radar and DAS equipments and that was just over £300,000,000 So you get a 200,000,000 to 300,000,000 and then the other £400,000,000 is the what I would call the normal trading from the businesses.
That's fair, Peter. Thank you very much.
Thanks.
As there are no further questions queued at this time, I would like to hand the call back to Ian King for any additional remarks.
My only additional remarks is thank you very much and have a good rest of the summer. Thank you.
Thank you.